Should You Invest in the Single-Family Rental Market?

By Jared Newman

Between 2020 and 2021, the average purchase price of a home went up 16.9%, according to the National Association of Realtors, from $346,900 to $391,700.

The real estate market is on fire.

The fact that the real estate market is hot has become a common narrative. Wherever you look, you can find articles and podcasts with stories of how people are being outbid on single-family homes. However, that has not stopped people from snatching up properties so far in 2022. Let's review why now is the time to invest in the single-family rental market.

6 reasons to invest in the single-family rental market right now

1. A demand for housing

According to the Realtor.com Monthly Housing Report, “the typical U.S. home spent 61 days on market in January, 10 days less than last year and nearly a month (-29 days) faster than the typical 2017-2020 pace.” As a result of the increased transactions, prices have continued to go up. The median listing price increased 10.3% up to $375,000 in January 2022 compared to January 2021. Furthermore, it represents a 25% increase from the median listing price in January 2020.

While the market may not sustain this type of price growth, there is no denying the fundamental rule of supply versus demand supports the argument that prices are still going to go up for the foreseeable future.

Realtor.com also released a report stating, “the gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021.”

According to the Census Bureau, there were 1,116,000 housing starts and 927,000 completions for single family properties in January 2022. As such, the housing deficit is around 5 times the expected single-family property new construction for 2022. The housing shortage is not going to be resolved anytime soon based on these numbers.

The one factor that mitigates the massive imbalance in supply versus demand is the United States’ minimal growth in population last year. The Census reports that the U.S. population increased by only 392,655 people (0.1%) in 2021 which is the slowest annual increase since nation's founding. This was caused by net international migration, decreased fertility, and increased mortality due in part to the Covid-19 pandemic. A bounce back, however, is expected in 2022 as long as Covid-19 continues to subside.

Overall, it is clear there is a dearth of supply in face of high demand. The lack of supply will continue to lead to higher prices. If you buy a single-family property as an investment, then gravity will be on your side.

2. Rents are up

Single family rents skyrocketed in 2021. According to the CoreLogic Single-Family Rent Index, single-family rent growth increased 12% in December 2021, the fastest year-over-year increase in over 16 years.

The damage has not been distributed equally across the country, however. The market of Miami was affected more than any other city and it’s not even close. The rent growth was an insane 35.7% in 2021; Phoenix placed second at 18.9%.

Realtor.com projects that rents will go up even more for single-family and multi-family properties in 2022, stating “at a national level, we forecast rent growth of 7.1% in the next 12 months, somewhat ahead of home price growth as rents continue to rebound from slower growth earlier in the pandemic.”

3. Mortgage rates are still low

Although mortgage rates have increased in the last few months, they are still at an acceptable level for investing in single-family properties.

According to Freddie Mac’s data, rates are heading back to pre-pandemic levels. As of early March 2022, the U.S. average for a 30-year fixed mortgage rate is 3.76%. During the pandemic, the average interest rate was as low as 2.65% in early January 2021. However, rates were in the 4s and high 3s for the majority of the period of 2010 to 2019.

4. We are in a seller's market

Multifamily properties are better assets to own in a market where buyers and tenants have the most leverage because the investor can still add value and increase the property’s value. They can spend time and money on making improvements to raise rents, lower expenses, and ultimately increase the value of the property. So why is now the time to invest in the single-family rental market?

The reason is because we are in a seller’s market. A single-family home investor can just sit back without spending much money and time on their asset. As long as the property is livable, the owner will be able to charge higher rent and see the property’s value appreciate because the entire market is trending up. They can still make improvements to the property if they want to get the max income and value out of the asset.

It is also much easier to deal with a single-family home than a multifamily property. With fewer units, there won’t be as many problems to fix and people to oversee.

In a tenant’s market, it’s a benefit to have a multifamily property so the owner will still have income each month from other tenants while they look to fill their vacancy. However, in today’s market, a landlord should be able to find a new tenant without much time elapsing. In addition, they will likely find a tenant who will pay more since rents continue to go up.

Overall, it requires less time and money for investors to purchase and maintain single-family properties than multifamily properties, and the market is better suited for single-family homes with sellers and landlords having leverage over buyers and tenants.

The statistics also provide support in favor of single-family properties. According to Redfin, single-family homes represented nearly 75% investor purchases in the third quarter (of 2021)—the highest level on record. Meanwhile, multifamily represented 3.4% of investor purchases.

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5. Non-real estate investments are less attractive

While there is the potential for plenty of money to be made from speculative investment strategies like cryptocurrency and sports betting, in today’s world there is nothing more attractive than buying a single-family home to rent out. As the "Oracle of Omaha," Warren Buffett, once said, it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” Now is the time to be fearful and play it safe by purchasing a single-family home.

There are plenty of other strategies you can employ that aren’t speculative, but it is likely they won’t be as profitable. While an index fund is supposed to increase 10% annually with compounded interest, Vanguard is not expecting that type of return anytime soon. In December 2021, Vanguard projected the lowest 10-year annualized returns for global equities since the early 2000s.

6. Single-family rental properties offer a great return on your money

There is never a guarantee when it comes to investing money. But there are clear indications which support the strategy of investing money in single-family homes. After all, investors have been buying them like hotcakes.

Redfin reports that investors bought a record 90,215 homes in the third quarter (of 2021). This number is up 10.1% from the prior quarter and up 80.2% from a year earlier. Overall, investors bought a record 18.2% of all the U.S. homes that were purchased in Q3 2021.

What does the future hold for the single-family rental market?

Only hindsight will tell us which investment strategy will have been the best in the post-pandemic economy. But taking advantage of today's hot single-family rental marketing and buying one single-family home is at least a way to diversify and mitigate risk from other investing methods.

About the Author

Post by: Jared Newman

Jared Newman is a former Vice President, Sales and Loan Officer at the hard money lending company Conventus Lending. He is now a freelance writer, specializing in finance and real estate.

Connect with me on Twitter and LinkedIn.